Shares of Skyward Specialty Insurance Group, Inc. SKWD have rallied 47.6% year to date, outperforming the industry’s increase of 30.7%, the Finance sector’s rise of 22.5% as well as the Zacks S&P 500 composite gain of 26.3% in the same time frame. 

Its improved top line, expanded margins and sufficient financial flexibility should continue to drive shares of this specialty property and casualty insurer. 

Skyward Specialty Outperforms Industry, Sector & S&P YTD

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SKWD shares are trading well above the 50-day moving average, indicating a bullish trend.

Optimistic Analyst Sentiment for SKWD

Three of the six analysts covering the stock have raised estimates for 2024, while five of the six analysts have raised the same for 2025. The consensus estimate for 2024 and 2025 has moved 2.7% and 48.5% north, respectively, in the past seven days.

The Zacks Consensus Estimate for 2024 implies a 45% year-over-year increase, while the same for 2025 suggests a 10.1% increase.

SKWD has a Growth Score of B. The expected long-term earnings growth rate is pegged at 10.3%

Average Target Price for SKWD Suggests an Upside

Based on short-term price targets offered by nine analysts, the Zacks average price target is at $50.33 per share. The average suggests a potential 0.7% upside from Tuesday’s closing price.

SKWD’s Growth Strategy

Skyward Specialty operates in an underpenetrated niche market for which standard insurance coverages are insufficient or inadequate. Thus, with tailor-made products and services, prudent underwriting and technology, this insurer is well poised to capitalize on the market opportunities. Notably, all eight divisions are now at a scale that can sustainably contribute to overall earnings.

Skyward Specialty’s focus on high-return areas that are less exposed to P&C cycles, prudent pricing, better retention and shifting of the business mix toward more profitable lines bodes well for growth. Its combined ratio, measuring its underwriting profitability, has been consistently improving.
 
Its intelligent investment strategy has been paying off well. It is de-risking its portfolio and diverting free cash flow to fixed income.  Notwithstanding the recent rate cuts and the probability of more in the future, a broader invested asset base should help SKWD maintain healthy investment results. 

Skyward Specialty has been strengthening its balance sheet by lowering its debt balance and increasing its cash balance. This, in turn, offers financial flexibility.

SKWD’s Return on Capital

Return on equity in the trailing 12 months was 16.4%, higher than the industry average of 7.5%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.

Its return on invested capital (ROIC) has been increasing in the last few quarters. The insurer has also invested over the same time period. This reflects SKWD’s efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 13.2%, higher than the industry average of 5.8%.

SKWD Shares Are Expensive

The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 2.51, higher than the industry average of 1.5. It also has a Value Score of A. Back-tested results have shown that stocks with a solid Value Score and a favorable Zacks Rank are the most attractive and their returns are better. 

Shares of other insurers like Aflac Inc AFL, The Progressive Corporation PGR and The Travelers Companies TRV are also trading at a multiple higher than the industry average.

Parting Thoughts

The insurer’s efforts to improve its top line, expand margins and shape a portfolio that offers the best risk-adjusted returns on capital enables SKWD to enjoy low underwriting volatility and a competitive moat. 

Despite its expensive valuation, given the positive analyst sentiment, its growth prospects and its VGM Score of B, potential investors can bet on this Zacks Rank #2 (Buy) insurer for higher returns. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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